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Thursday, May 03, 2007

Annals of Neo-Soviet Economic Delusion

RIA Novosti reports:

The Russian government has approved an excessively optimistic socioeconomic development forecast for 2008-2010.

According to its predictions, the Russian economy will grow by at least 5.2% annually despite possible changes in energy prices and sluggish demand for Russian goods.

The influence of oil quotations on the Russian economy has diminished, and growth is unlikely to be driven by energy exports. Instead, according to the government, the Russian economy should seek to increase domestic demand.

Nevertheless, oil prices are the key parameter of the development program for the next three years. According to the Ministry of Economic Development and Trade, Urals crude will cost $53 per barrel in 2008, $52 in 2009, and $50 in 2010.

The government is shifting its focus from the oil and gas sector to the manufacturing industry, the consumer sector and a general growth in consumption. The food sector should increase sales by 27% in 2010 compared with 2006, the textiles industry should grow by 43.1%, and mechanical engineering by 20%-30%. Demand on the domestic market will determine the pace of economic growth.

Under a moderately optimistic scenario, GDP will grow by 6.1% in 2008, 6% in 2009, and 6.2% in 2010.

If we assume that the demand for Russian-made goods will not grow dramatically in the next few years, the federal budget, prospective financial plans and the inflation outlook should be based on the "inertial scenario." According to this, GDP growth will slow down from 6.5% in 2007 to 5.7% in 2008, 5.3% in 2009, and 5.2% in 2010. The figure for 2006 was 6.7%.

The ministry has forecast a growth in average monthly wages by 90% in nominal terms by 2010 compared with 2006, and a rise in real incomes by up to 27%. Wages in Russia are growing faster than labor productivity as it is, which is accelerating inflation and distorting the employment market because of a shortage of skilled labor.

The government intends to keep up a high rate of economic growth even in the most unfavorable scenario, for even the 5.2% growth in GDP forecast under the inertial scenario is impossibly high for many industrialized countries.

Apart from energy prices, the government will continue to monitor inflation as "a major trend characterizing the macroeconomic situation in the country."

Unfortunately, Russia is lagging far behind industrialized countries in this sphere, as consumer prices are expected to grow by at least 5%-8% a year until 2010. The reasons are the overpowering influence of monopolies and a considerable inflow of revenues from energy exports. The money is coming in faster than the government can sterilize it.

A high rate of inflation is not the only obstacle to the government's plans. Other very serious problems are the lack of a modern transport infrastructure, the overstrained energy system, excessive energy consumption per item manufactured, and high dependence on the commodities sector.

Most importantly, Russia is lagging behind industrialized countries and fast-developing emerging economies in terms of technological standards. Economic Development and Trade Minister German Gref said the Russian model of economic development should be overhauled, because Russian business is largely uncompetitive compared with its foreign rivals.

The government must find a way to convince Russians to buy Russian. High-quality economic growth cannot be ensured through an increase in production in basic sectors without investing in up-to-date technologies and innovation. Even the promised wage rise will not convince Russians to buy Russian-made goods, for when their incomes grow to a certain level, they start buying high-quality foreign goods.

Russian leaders keep saying that the national economy should be diversified and realigned toward knowledge-based development supported by favorable investment opportunities and effective market mechanisms. These ideas have been incorporated in the government's outlook for 2008-2010. It looks good on paper, but the Russian economy will not become competitive until these ideas become reality.

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